European stock markets reacted positively to the rate cut, as lower rates are expected to ease borrowing costs for businesses and consumers. However, alongside the rate reduction, the ECB revised its growth forecasts downward for every year through 2026, signalling concerns over the region’s economic outlook.
US stocks also posted a strong performance this week, supported by data showing that inflation continues to trend downward. The Consumer Price Index (CPI) for August revealed a 2.5% annualised increase, the lowest since February 2021, indicating moderating inflation. Wholesale prices also rose by 0.2% in August, meeting market expectations and further reinforcing the narrative of controlled inflation. This has strengthened the case for a potential rate cut by the Federal Reserve.
While investors have scaled back some of their more aggressive bets on the size of potential rate cuts, optimism is growing ahead of the Federal Reserve’s policy decision meeting on September 17-18. The market has largely priced in a 25-basis-point cut, with the current target rate standing at 5.25% to 5.5%.
In other news, US consumer confidence rose in September. The University of Michigan’s sentiment index increased to 69, surpassing expectations and reflecting stronger consumer optimism. Consumers’ outlook on personal finances and the economy has also improved despite concerns about the labour market. Additionally, inflation expectations for the year ahead eased slightly to 2.7%, signalling reduced concerns about near-term inflationary pressures.
Despite this positive sentiment, we remain cautious of potential volatility. Markets tend to get ahead of themselves, and we are mindful that a rate cut doesn’t necessarily indicate the start of a cutting cycle. We expect policymakers to maintain a data-dependent approach, reacting to broader economic trends rather than isolated data releases.
On Sunday, news broke of an apparent assassination attempt on former President Donald Trump at his Florida golf course. Secret Service agents fired at a suspect after spotting an AK-47-style weapon poking through the bushes. Trump was unharmed. This incident comes just two months after a gunman attempted to assassinate Trump at a rally in Butler, Pennsylvania, grazing his ear. While US equity futures remain steady, investors are evaluating the implications of the event as the November election approaches, with a tight race expected between Trump and Vice President Harris.
It’s a busy week ahead for markets. The Federal Reserve (Fed), the Bank of England (BoE), and the Bank of Japan (BoJ) will announce their latest policy decisions this week. Markets aren’t expecting any sudden moves from the BoE and BoJ, but are pricing in a rate cut from the Fed. In terms of economic data, we can expect reports on US industrial production, retail sales, and PMI. Additionally, the UK and Eurozone will release their CPI, consumer confidence, and PMI data.
Kate Mimnagh, Portfolio Economist
